Per Sanjay Arora, AM These are set of two Appeals by the Revenue arising out of the Orders by the Commissioner of Income-tax (Appeals)-II, Kochi (CIT(A) for short) for the assessment year (A.Y.) 2002-03 (dated 30.9.2008) and A.Y. 2004-05 (dated 14.10.2008). As the appeals raise the same issue, these were heard together and are being disposed of by a common order. 2.1 The issue in appeal is whether the interest on mobilisation advances, received by the assessee in the sum of Rs. 106.80 lakhs and Rs. 182.43 lakhs for the two years respectively, is capital or revenue in nature. The assessee-company is a public sector company engaged in the construction and development of infrastructure projects like roads and bridges; its dominant activity being construction of roads, over-bridges in lieu of level crossings, in the State of Kerala. The work is executed through contractors engaged per the process of inviting tenders. The company, as a part of the prevalent practice, pays 10% of the contract value as what is called a `mobilisation advance to the contractors, for mobilising men and materials at the site. The company ITA Nos. 1013, 1014/Coch./2008 also charges interest on the outstanding amount of the advance from the contractors at the rate of fourteen per cent. (14%) per annum. The advance as well as the interest amount is recovered from the running account of the contractors against work executed. The assessee credited the said interest to capital work-in-progress on the premise that it goes to reduce its cost. Toward the same, it relied on the decision in the case of CIT vs. Bokaro Steel Ltd., 236 ITR 315 (SC). The same, however, was not found acceptable by the Assessing Officer (A.O.), in whose view the decision in the case of Tuticorin Alkies and Chemicals Ltd. v. CIT, 227 ITR 172 (SC) applied in the facts and circumstances of the case. Further, the same stood followed by the Honble jurisdictional High Court in the case of CIT vs. Cochin Shipyard Ltd. (2000) 158 CTR (Ker.) 208. Further on, the said Court in the case of Nanji Topanbhai & Co. vs. Asst. CIT, 243 ITR 192 (Ker.) held that interest on deposits given as collateral security for funding business loans is also not income from business but only income from other sources. Several other decisions by the Honble jurisdictional High Court stood relied upon by the A.O. in bringing the impugned amounts to tax as income from other sources: K.P. Ravindranathan Nair v. Dy. CIT, 262 ITR 669 (Abad Enterprises v. Commissioner Of Income-Tax, 253 ITR 319 (Ker.) CIT v. Jose Thomas, 253 ITR 553 (Ker.), CIT v. Vaikundam Rubber Co. Ltd., 241 ITR 50 (Ker.) K. Nandakumar v. ITO, 204 ITR 856 (Ker.) Southern Cashew Exporters v. CIT, 183 CTR (Ker.) 172 Commissioner Of Income-Tax v. G. Satheesh Nair, 183 CTR (Ker.) 175 CIT v. Cochin Refineries Ltd., 154 ITR 345 (Ker.) Collis Lines (P.) Ltd. v. CIT, 135 ITR 390 (Ker.) 2.2 In appeal, however, the assessee found favour with the ld. CIT(A), who was of the view that the decision in the case of Bokaro Steel Ltd. (supra) was squarely applicable in the facts of the case. The advance at the rate of 10% of the contract value is only in terms of the contract and, thus, arises out of the contractual obligation ITA Nos. 1013, 1014/Coch./2008 assumed. It is, as such, intrinsically related to the construction project, and the decision in the case of Bokaro Steel Ltd. would become applicable, reproducing the relevant part thereof. The second issue before the ld. CIT(A) related to the exigibility of the said interest to deduction u/s. 80IA of the Income-tax Act, 1961 ('the Act' hereinafter), which stood denied by the AO on the ground that the same does not represent profit derived from the assessees industrial undertaking and, in fact, is assessable as income from other sources, relying on the decision in the case of Commissioner Of Income-Tax v. Sterling Foods (Goa)., 237 ITR 579 (SC) and Pandian Chemicals Ltd. vs. CIT, 262 ITR 278 (SC). The same stood not adjudicated by him, being infructuous in view of his holding the interest received as capital in nature. Aggrieved, the Revenue is in appeal.
3. Before us, like submissions stood raised by either side, each relying on the Order of the authority below as favourable to it. The ld. DR, in addition, placed reliance on the decision in the case of Totgars Cooperative Society Ltd. vs. CIT, 322 ITR 283 (SC). The ld. AR, on the other hand, would submit that the assessee- company is a nodal agency for the Government of Kerala for development of infrastructure in the State. It acts only as a facilitator, executing the projects on Build Operate Transfer (BOT) basis. The AO had failed to consider the decision in the case of Bokaro Steel Ltd. (supra).
4. We have heard the parties, and perused the material on record, as well as the case law cited. 4.1 We would, firstly, address the issue on first principles; the invocation of the different decisions, which stand relied upon by both the sides, would only follow, being supportive to the factual findings in the case. `Income is something that flows from a property, while `capital is something received in lieu thereof. Classical examples of `income would be fruit from a tree, crop from land, milk from cow, produce of a factory, remuneration against labour, etc. Also, income is subject to the ITA Nos. 1013, 1014/Coch./2008 charge of tax at the point of its accrual, and would not depend on its destination or the manner or its utilization. Interest income is per se revenue in nature, arise as it does from the user of the financial resource or capital of one, by another, at a cost, so that it is not an accretion to capital but a gain that arises there-from on it being utilized fruitfully instead of being kept idle. That it follows an understanding or a contractual arrangement to that effect, would be of no consequence, rather, make it all the more so; the form even otherwise seldom leading to the determination of the character of the receipt, which, in the case of interest, other than where awarded by way of compensation or damages, so that it is received toward a property or its loss, thus assuming the nature of a capital receipt, always bears the character of income [refer: Tuticorin Alkies and Chemicals Ltd. (supra)]. 4.2 The advances in the present case are admittedly given to facilitate the execution of their work by the contractors, so that they could mobilize men and materials, including equipment, which they would require for the purpose. The same, thus, is essentially in the nature of a financing arrangement, with a view to enable proper and timely execution of the work, i.e., which they are even otherwise obliged to do and, further, only at a cost to them, so that it has commercial considerations attached to it. Why, a contractor with access to sufficient funds, or to a lower cost of borrowing, may well choose not to avail the advance or avail it at a lower amount. In other words, the scope of the arrangement being toward financing the work, even if it were to be considered as the assessees obligation, which again only stems from the consideration of providing some, and uniformly at that, support to the contractors hired, the `gain associated therewith could never be treated as forming an integral part of the project cost, which may thus go to reduce the same. A finance cost, by definition, is one which arises on account of lack of own funds or capital vis--vis that required, so that it would depend on the availability of funds. The arrangement thus is an imposed one, secondary to the primary task, even if it is enabling in nature. A contractor may still face shortage of capital, and resort to additional borrowing for the purpose. Then, again, is the question of the rate of interest, which is being charged at a ITA Nos. 1013, 1014/Coch./2008 commercial rate. The funds, utilized like-wise, would impact the project in the same manner, while the borrowing rate could well be different, leading to a `reduction in project cost at different amounts. It is only direct costs, and which would remain same across all financing patterns, that can be considered as part of the cost of the project. That the practice stands institutionalized, or more or less so, as it appears, again, would be besides the point, as that would not have any bearing on the character of the receipt or the nature of the cost, i.e., direct or indirect. All that it would imply is that the financing pattern being uniform, the tender bid by the different contractors would eliminate considerations of financial cost, or largely so, depending upon the adequacy of the quantum of finance extended in relation to the requirement, which becomes a constant factor for them at 14% p.a. How would it matter, one may ask, and only to illustrate the point in issue, if the assessee were to extend loan to an intermediary, which would in turn finance the contractors? The assessee, instead of receiving interest from the contractors would do so from another, and the contractors would bear the same, not by way of deduction of their receipt from the assessee, but by paying the same directly to the financier; the receipt from the assessee standing to increase to the same extent. That is, both the assessee and the contractors would stand to gain or loose, in lieu of the time value of the capital extended, in the like manner, but it could no longer be contended that the interest receipt is a capital receipt which would go to reduce the cost of the project. This would be so even if it is done under a tripartite arrangement, with the assessee earmarking funds to that extent against its ongoing projects. Could a simple change in the format of a receipt lead to a change in the character of the receipt ? is the question that requires to be answered. The answer would only be an emphatic no. In fact, in actual practice, or as another variant to the model, it is not even necessary that there is an intermediary, and the person paying interest to the assessee and lending monies to the contractors may well be different. The idea or the purpose of the example was just to highlight the issue, keeping the format simple. Again, that in actual practice there would be some agency cost associated with the intermediary, is again not relevant and besides the point, and which would only impact the quantum of the receipt and not its character. The source ITA Nos. 1013, 1014/Coch./2008 of interest income for the assessee, it is to be appreciated, is the funds, and not the manner of their utilization by the contractors, which alone would qualify the gain arising to the assessee as intrinsic to the execution of the project. The decision in the case of Pandian Chemicals Ltd. (supra), where the interest income was from the deposit with the electricity department, given to them under the terms of the power supply arrangement for the assessees industrial undertaking, was held as not an income `derived there-from, but only from a secondary source- funds, inter alia, again, illustrates the issue, as well as the application of the law in its respect. (Also refer para 4.4). 4.3 Further on, we find the decision by the Honble jurisdictional High Court in the case of Cochin Shipyard Ltd. (supra), another public sector undertaking of the State Government, rendered following the decision by the Apex Court in the case of Tuticorin Alkies and Chemicals Ltd. (supra), as squarely on the point, as would be apparent from the bare narration of the facts stated at para 2 of the said Judgment. The matter is essentially one of law to be applied in the facts of the case, and which we find as answered completely in the case of Cochin Shipyard Ltd. (supra) on almost the same set of facts. The distinguishment by the ld. CIT(A) of the case of Tuticorin Alkies and Chemicals Ltd. (supra), by observing that the earning in that case was not connected with the business activity, so that it could be used in any manner by the company, is, in our view, not on the point. The question here is not whether the interest income under reference arises out of business activity or not, but of its being capital or revenue in nature. Secondly, we see no basis for his holding that the said income could not be used by the assessee in the present case in any manner it liked, so that the same would itself point out to the applicability of the said decision, as well as the distinguishment from the case of Bokaro Steel Ltd. (supra). 4.4 In the case of Bokaro Steel Ltd. (supra) it was a capital project that was being set up and, secondly, the receipt(s) under reference was inextricably linked with its execution. In the present case, on the other hand, the projects being executed would ITA Nos. 1013, 1014/Coch./2008 not result in capital assets of the assessee-company; it being an agency engaged in executing projects, so that the same - as far as it is concerned - are only its stock-in- trade. Further, the income, considered as leading to the reduction in the project cost, arose from the very assets/equipment deployed in the execution of the project. As such, apart from our finding of the assessees projects as not representing its capital assets, implying forming part of its capital structure, but as a part of its trade or business, the said decision is even otherwise, i.e., on the basis of the peculiar facts of the said case, wherein the processes generating income were found to be inextricably linked with the setting up of the assessees steel plant, inapplicable. Reliance on the same is, thus, misplaced. 4.5 The assessee has we find sought to emphasize the fact that the advances under question were given by way of a normal business practice to contractors, and besides going to mobilise men and materials, also utilized for procuring necessary equipment at the work site. Firstly, as would be apparent from a bare reading of the factual setting in the case of Cochin Shipyard Ltd. (supra), there is a complete parity of facts with the present case. Secondly, it is immaterial, qua the issue at large, whether the contractors utilize the funds advanced to mobilise men and material, or also for the necessary equipment; the purpose of the same, in either case, being only to enable them to execute the project without any financial hitch, as observed by the Honble jurisdictional High Court. 4.6 Further on, the fact that the advances given to the contractors, as well as the interest received thereon, are in terms of a contract, is of no consequence, and the ld. CIT(A), in our view, has misdirected himself in being moved by the same. Interest income, or the business transactions in general, would normally arise only out of a contractual relationship, i.e., in contradistinction to that by status. The question here, however, is of the nature of the receipt. The assessees argument before him, that it had also incurred interest expenditure on funds borrowed for construction, so that the same would go to increase the cost thereof, and likewise, the interest received would ITA Nos. 1013, 1014/Coch./2008 go to decrease its cost, and which also weighed with him in holding the interest income as principally related to the construction, is misconceived and without basis. Firstly, there is no finding by him of the assessee increasing the project cost with the interest on borrowings utilized in the execution of the project. Secondly, neither as per the normal or commercial accounting principles, which are honoured by the law, nor as per the income-tax law, the interest on borrowed funds would go to increase the cost of the project, whatever be its size or the timeframe required to execute the same, where the project is not a capital asset of the entity paying the interest, as in the instant case. The same would only form part of the regular business expenditure, deductible u/s. 36(1)(iii), on the finding of utilization of the relevant borrowing for the purpose of the assessees business. 5.1 In view of the foregoing, including the law in the matter as laid down by the apex Court in the case of Tuticorin Alkies and Chemicals Ltd. (supra); Pandian Chemicals Ltd. (supra), to name some, we consider the interest on mobilization advances as rightly assessed as a revenue receipt in the present case, and its reversal by the ld. CIT(A), holding it as a capital receipt, merits being set aside, and is accordingly so directed, following, further, the decision in the case of Cochin Shipyard Ltd. (supra), which is squarely applicable in the facts of the case. 5.2 The ld. CIT (A) has not adjudicated the assessees second issue raised before him (refer para 2.2 of this order) in view of his finding in relation to the first issue, in appeal before us, in assessees favour. Though not specifically urged before us at the time of hearing, which we consider as not material and, under the circumstances, only deem it fit to direct the ld. CIT(A) to do so now in accordance with law, and after hearing both the sides; his findings and, concomitantly, decision on the first issue aforesaid having been reversed per this order, so that the second issue would require being answered by him. ITA Nos. 1013, 1014/Coch./2008
6. In the result, the appeals by the Revenue are allowed. sd/- sd/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Ernakulam Dated: 31st May, 2010 Copy to:
1. M/s. Roads & Bridges Development Corporation of Kerala Ltd., 2nd Floor, Preethy Bldg., M.V. Road, Palarivattom, Cochin-682 025.
2. The Assistant Commissioner of Income Tax, Circle-1(3), Ernakulam.
3. The Commissioner of Income-tax (Appeals)-II, Kochi.
4. The Commissioner of Income-Tax, Kochi.
5. D.R./I.T.A.T., Cochin Bench, Cochin.
6. Guard File. By Order (ASSISTANT REGISTRAR)
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